Brian's Blog

In continuing the debate that HBS brought to Washington late last month, I’m take a closer look at their third recommendation regarding taxing overseas profits of US-based businesses.

As discussed previously, there are many ways to implement the HBS recommendations on global competitiveness. Therefore, in this case, I did a little more research into some of the latest literature and research and did a quick economic impact analysis looking at the direct impacts of one of the proposals out there on the topic that focuses on the repatriation of corporate profits.

3. Create a competitive international tax code with other developed countries, eliminating the need for tax havens, and encourages the repatriation of profits. It is estimated that there is approximately $1.4 trillion dollars of earnings from US corporations sitting overseas waiting to be both repatriated AND invested in the US economy. But since those earnings would be subject to the referenced tax rate above, companies are keeping that money overseas in foreign tax havens. REPEAT… $1.4 trillion. That is double the amount of the entire Recovery Act.

In the same study, the US Chamber suggests that to encourage the repatriation of this US-based capital, that the tax be lowered from a statutory rate of 35 percent to 5.25 percent, for the repatriated funds. In addition to the direct stimulus that would result as that capital makes its way into the economy, there would be a $73.5 billion payday into the US Federal corporate tax rolls. Below is some additional economic impact analysis on this proposal:

·Employment: 3 million additional US jobs. For the sake of a quick analysis, I spread these new entrants into the US labor force evenly over from 2013 through 2017.

·Unemployment: This proposal would have the effect of adding new jobs to the economy, putting more US workers to work.

·Income Tax Revenue: These new entrants into the US payrolls would pay taxes. I used estimates of personal disposable income per capita through 2017.

·Corporate Revenue: By adding and filling these new jobs to the US economy, corporate output would increase commensurate to the increase in employment. I used estimates of worker productivity through 2017 for this calculation.

·Corporate Tax Revenue: As corporate revenue increases, so does federal, state, and local income revenue. I applied the 2012 total federal, state, and local corporate tax rate through 2017.

Estimated Economic Impact of Corporate Profits Repatriation

2013

2014

2015

2016

2017

Employment (annual)

600,000

600,000

600,000

600,000

600,000

Employment (cumulative)

600,000

1,200,000

1,800,000

2,400,000

3,000,000

Decrease in Unemployment Rate

0.39%

0.78%

1.16%

1.55%

1.94%

Income Tax Revenue (billions $)

7.00

15.10

24.84

36.25

48.40

Corporate Revenue (billions $)

46.61

94.07

142.39

191.55

241.56

Corporate Tax Revenue (billions $)

27.50

55.50

84.01

113.02

142.52

With the Recovery Act funding nearly depleted and the US economy still lagging, it just makes sense to focus on some of the major economic opportunities present to us at this time. There are obviously many nuances in terms of exactly how to go about the earnings repatriation. And even if the study by the US Chamber overstated the jobs impact by over double, it would still be a non-trivial economic impact on US jobs and federal tax revenue.

4. Aggressively address distortions and abuses in the international trading system that disadvantages the US, such as subsidies and lack of IP protection, using established international institutions. As we have seen domestically in the music and video sector in the US, there is room for advances for the medium for delivery of entertainment while maintaining the intellectual property rights. This was not without pain – recall the runway between Napster and iTunes – not a short trip. And just as we thought that debate was over, there was a debate this week, started by an NPR blogger that highlights the magnitude of the lingering impacts of domestic counterfeiting.

But just as we made progress domestically, we need to make strides internationally. And make no mistake about it. The term “international intellectual property rights protection” is largely misleading. According to an annual brand equity survey conducted for Business Week, the top twenty brands make up a total of $563 billion in brand value. And of this, $440 billion, or 78 percent, belongs to US Corporations. This part of the argument is simply a domestic asset protection issue.

Therefore, the US must lead the world in advocating for intellectual property right protections. In a study released by the OECD, The Economic Impact of Counterfeiting and Piracy, estimates that in 2007, international piracy and counterfeiting added up to $250 billion in underground global trade. BSA, Deloitte, and IFPI, published by the OECD, it is estimated that US-based business and entertainment software, motion picture, and music sales, there is an annual lost sales revenue impact of $17.5 billion. The second portion of the argument is a US investment issue. US corporations will divide this $17.5 billion in additional revenue up in terms of retained corporate profits, distributed dividends, additional investment, and additional labor force. Therefore, this analysis was approached slightly different than those above:

·Corporate Revenue: In applying this $17.5 billion in additional corporate revenue to the US economy, I added it evenly over the next five years, assuming that there is not an overnight solution to solving this problem

·Corporate Tax Revenue: As corporate revenue increases, so does federal, state, and local income revenue. I applied the 2012 total federal, state, and local corporate tax rate through 2017.

·Employment: The impact on US employment was estimated by looking at the average estimated allocation of investment in labor over the past ten years and allocating additional labor proportionally over the next five years, based on the increased corporate revenue.

·Unemployment: This proposal would have the effect of adding new jobs to the economy, putting more US workers to work. Therefore, to estimate the impact on unemployment, the additional workers above are added to the labor force.

·Income Tax Revenue: These new entrants into the US payrolls would pay taxes. I used estimates of personal disposable income per capita through 2017.